Safety stock explained for small businesses

Safety stock has an unglamorous job. It sits on the shelf and does nothing, right up until the day a delivery is three days late. Then it is the only reason you still have something to sell.

Too little and you get stockouts. Too much and you tie up cash in boxes that gather dust. The art is in choosing a cushion that matches how unpredictable the world is for that particular item.

Two sources of surprise

A cushion protects you from two things. Demand can run higher than usual: a cold snap, a promotion, a big customer. Supply can run slower than usual: a late truck, a short shipment, a supplier out of stock.

Most small shops get far more grief from the second kind. Your sales for a given item are usually fairly steady, but delivery times wobble. That suggests an easy way to size the cushion for a start: look at how late your supplier gets.

A simple way to size it

You do not need statistics to start. Take the worst delay you have actually seen from the supplier, and multiply it by your average daily use. That is a cushion that would have survived your worst recent delivery.

That is how the 12 in the reorder point example came about. It is not scientific, and it is a good deal better than a round number picked from the air. For the full formula, see How to set a reorder point for an inventory item.

What too much costs

Extra stock is not free. It takes up space, ties up cash and ages. For items that expire or go out of fashion, a big cushion can become a write-off. If you hold a month of safety stock on something that sells slowly, you are quietly carrying a large part of your year in it.

A cushion that never gets used is not safety. It is storage.

When to change it

• After a stockout. If the cushion failed, find out why, then adjust.
• When a supplier changes. A new supplier has new delays.
• In busy seasons, when demand runs hotter.
• When an item stops selling, so the cushion can shrink with it.

A worked comparison

Say you sell 2 cases of hand soap a day and two suppliers offer it at the same price. Supplier One delivers in 4 days, give or take a day. Supplier Two delivers in 3 days, give or take four.

• Supplier One: the worst delay is 1 day, so the cushion is 1 x 2 = 2 cases.
• Supplier Two: the worst delay is 4 days, so the cushion is 4 x 2 = 8 cases.

Supplier Two is faster on paper and ties up four times as much cash in the cushion. If the price is the same, the slower, steadier supplier is cheaper to live with. Few people think to count that.

It also shows why asking a supplier to be more consistent is a legitimate request. A promise of 'always within a day' is worth real money to you, and some will agree to it if you ask.